Chapter-01

Introduction

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1.0 Introduction
For fulfilling the partial requirement of MBA (Evening) program I was placed to “Sonali
Bank Ltd” for the three months internship program at Motijheel Branch.
This report is based on this internship program, supervised by Professor Sonia Munmun,
Assistant Professor, Department of Finance, Jagannath University. After realizing the
situation my honorable supervisor selects the topics of the report as “A report on Non-
Performing loans of Sonali Bank Ltd, Motijheel Branch”.

1.1 Objectives of the Report

The objectives of the study are as follows:
1. To know overall non-performing loans of the Sonali Bank, Motijheel Branch
2. To know the borrower selection, loan approval, disbursement and recovery
system of Sonali Bank Limited, Motijheel Brunch.
3. To evaluate current condition of Non-Performing Loans of Motijheel Branch.
4. To recommend some critical points based on the entire analysis.

1.2 Scope of the Study

To find out the report requirements I had to make concentration on officers and
employees of Sonali Bank Ltd, Motijheel Branch. The main focus of the report is on the
evaluation of Non-Performing loans of that branch. Although Motijheel Brunch doesnot
deal with all the activities that Sonali Bank as a whole has to offer, I try to understand the
overall scenario of the Non-Performing Loans of that particular branch. So I try to
analyze the overall condition of Non-Performing loans of Motijheel brunch for the last 5
years.

1.3 Sources and Methodology

Sources of Data: Both primary and secondary have been used to prepare the report.
Primary Data: Primary data comes from the informal interviews with the branch
manager and other employees of the Motijheel Branch of Sonali Bank. The authors own
observation and realization from the organizational environment are another sources of
primary data.

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Secondary Data: Secondary data comes from different published sources like the
website of Sonali bank and Bangladesh Bank, soft copy of bank records of loan and data
from bank archives. For theoretical analysis, concept and information are collected from
textbooks, research reports, bank handbook, and different kinds of literature on banking
activities etc.

Data Analysis: The analytical of the report shows the analysis of Non-Performing loan
for last 5 years and the regression analysis shows the correlation between data.

1.4 Limitations of the Report

As it is my first-hand experience towards an organization, I feel lots of problems
regarding the preparation of the report. After working the whole day in the office it was
way difficult to study again the theoretical aspects of banking. On the way to my study, I
have faced the following problems, which may be termed as the limitation or
shortcoming of the study. These are as follows:
1. The main constraint of the study is inadequate access to information, the websites
and published reports don’t help much.
2. A lot of confusions regarding verification of data
3. Inexperience in analyzing a huge volume of data is one of the main constraints of
the study.

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 Chapter-02
Overview of Sonali Bank Limited

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2.0 Overview of Sonali Bank Limited
Soon after independence of the country Sonali Bank emerged as the largest and leading
Nationalized Commercial Bank by proclamation of the Banks' Nationalization Order
1972 (Presidential Order-26) liquidating the then National Bank of Pakistan, Premier
Bank and Bank of Bhwalpur. As a fully state owned institution, the bank had been
discharging its nation-building responsibilities by undertaking government entrusted
different socio-economic schemes as well as money market activities of its own volition,
covering all spheres of the economy.
The bank has been converted to a Public Limited Company with 100% ownership of the
government and started functioning as Sonali Bank Limited from November 15, 2007
taking over all assets, liabilities and business of Sonali Bank. After corporatization, the
management of the bank has been given required autonomy to make the bank
competitive & to run its business effectively.
Sonali Bank Limited is governed by a Board of Directors consisting of 11 (Eleven)
members. The Bank is headed by the CEO & Managing Director, who is a well-known
Banker and a reputed professional. The corporate head quarter of the bank is located at
Motijheel, Dhaka, Bangladesh, The main commercial center of the capital.

2.1 Operational Network:

Sonali Bank is the largest Nationalized Commercial Bank in our country. With the head
office of Bank is located at the Motijheel Commercial Area, Dhaka, 11 general
manager’s offices, 46 Principal offices and 16 regional offices all over the country. The
division is headed by the DGMS and the Departments are by AGMS. There are also
many sections under every Department in the Head office. Head office consists of 44
Departments. 73 booths under different branches are performing specialized functions at
different locations. The overall functions of the branches are supervised and monitored
by 70 administrative structure comprises Head office in Dhaka

Here are some key factors about Sonali Bank Limited

 Its authorized capital is about Tk. 6000.00 Crore and Its paid up capital is Tk.
3830.00 Crore.

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  Total number of brunches of Sonali Bank Limited are 1208 which include 2
foreign brunches. It has more rural brunches than urban brunches. Number of
rural and urban brunches are 644 and 563.
 Sonali Bank (UK) Limited having 2 (Two) branches in UK.
 Sonali Polaris FT Limited is one of the two associates of Sonali Bank Limited
 Sonali Exchange Company Incorporated (SECI) having 10 (Ten) branches in
USA.
 Sonali Investment Limited (Merchant Banking) having 4 (Four) branches at
Motijheel, Paltan, Uttara, Mirpur in Dhaka and 1 (One) branch in Khulna,
Bangladesh.

2.2 Historical Background of Sonali Bank Limited:

Soon after independence of the country Sonali Bank emerged as the largest and leading
Nationalized Commercial Bank by proclamation of the Banks' Nationalization Order
1972 (Presidential Order-26) liquidating the then National Bank of Pakistan, Premier
Bank and Bank of Bhwalpur. As a fully state owned institution, the bank had been
discharging its nation-building responsibilities by undertaking government entrusted
different socio-economic schemes as well as money market activities of its own volition,
covering all spheres of the economy.

The bank has been converted to a Public Limited Company with 100% ownership of the
government and started functioning as Sonali Bank Limited from November 15, 2007
taking over all assets, liabilities and business of Sonali Bank. After corporatization, the
management of the bank has been given required autonomy to make the bank
competitive & to run its business effectively.

Sonali Bank Limited is governed by a Board of Directors consisting of 11 (Eleven)

members. The Bank is headed by the CEO & Managing Director, who is a well-known
Banker and a reputed professional. The corporate head quarter of the bank is located at
Motijheel, Dhaka, Bangladesh, the main commercial center of the capital.

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2.3 Corporate profile of Sonali Bank Limited:
Company
Name of the Chairman
CEO & Managing Director
Company Secretary
Legal Status
Genesis
Date of incorporation
Date of vendor’s agreement
Registered
Sonali Bank Limited.
Mr. Md. Ashraful Moqbul.
Mr. Md Obayed Ullah.
Mr. A.K.M Sajedur Rahman Khan.
Public Limited Company.
Emerged as Nationalized Commercial Bank in
1972, following the Bangladesh Bank.
(Nationalization)
03 June, 2007
15 November, 2007
35-42, 44 Motijheel Commercial area, Dhaka,
Bangladesh.

Authorized Capital Taka 6000.00 crore.

Paid-up Capital Taka 3830.00 crore.
Number of Employee 18806
Number of Branches 1211
Phone-PABX 9550426-31,33, 34, 9552924
Fax 88-02-9561410, 9552007
SWIFT BSONBDDH
Website www.sonalibank.com.bd
Website: http://www.sonalibank.com.bd/profile_php
Table 1: Corporate profile of Sonali Bank Limited

2.4 Vision and Mission of Sonali Bank Limited

Vision:
Socially committed leading banking institution with global presence
Mission:
Dedicated to extend a whole range of quality product that support divergent needs of
people aiming at enriching their lives, creating value for the stake holders and
contributing towards socio-economic development of the country.
2.5 Corporate Slogan of the Bank:
“Your Trusted Partner in Innovative Banking”

2.6 Corporate Logo of the Bank:

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2.7 Core Values:
Sonali Bank Limited (SBL’s) proposition consists of ten key elements. The values would
assist the bank in perceiving its employees to work as a team towards accomplishment of
assigned duties and responsibility for achievement of desired objectives.

Source: Annual Report-2018

Figure 1: Core Values of SBL.

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2.8 Organogram of Sonali Bank Limited

Source: Annual Report 2018

Figure 2: Organogram of Sonali Bank Limited. (Position wise)

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2.9 Board of Directors
SL. NO Name Designation
1 Mr. Md. Ashraful Moqbul Director & Chairman

2 Mr. Md. Fazlul Haque Director

3 Mr. Md Mahboob Hossain Director

4 Mr. Md. Shaheb Ali Mridha Director

5 Mr.Kazi Tariqul Islam Director

6 Mr. Afzal Hossain Director

7 Mr. Mohammed Asadullah Director

8 Mr. A.K.M Kamrul Islam Director

9 Dr. Md. Nurul Alam Director

Talukder
10 Mrs. Sabera Aktari Jamal Director

11 Mr. Md. Obayed CEO & Managing Director

Ullahmasud
Source: Annual Report 2018
Table 2: Board of Directors of SBL

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2.10 Business Unit of Sonali Bank Limited:
Corporate Banking
Retail Banking
Small & Medium Enterprise (SME)
Treasury
Remittance Service
Time Deposit Scheme
Deposit insurance Scheme
Remittances service
Import finance
Export Finance
Loan syndication
Trade finance
Industrial Finance
Locker Service

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2.11 Sources and Uses of Funds
Sources of Funds Uses of Funds

Authorized Capital Cash in Hand

Issued Capital
Subscribed Capital
Called up Capital
Paid up Capital
Reserve Capital
Other Reserves
Deposits and other accounts
Borrowing from Banking
Companies, Agency
Loan from central Bank
Balances in Current Account with
other banks
Call Loan
Short Loan
Purchase of Govt. credit
instrument, share, secuirity.
Bills discounting and treasury bill
Loans and Advances

Source: Annual Report 2018

Table 3: Sources and Uses of Funds of SBL.

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2.12 Credit Rating of Sonali Bank Limited
As per Bangladesh Bank’s mandatory requirement vide BRPD Circular No.06 dated 05
July, 2006, credit rating of Sonali Bank Limited was done by the Emerging Credit Rating
Ltd. on the audited Balance Sheet as on 31-12-2017 and other related information. The
rating of the report is as under:
Credit Rating Report ( Initial Rating)

Initial Rating-2017 Long Term Short Term

Government Support AAA ECRL-1
Without Government support A- ECRL-2
0utlook Stable
Date of Rating 30 June 2018

Financial Institutions Rating Symbols awarded to Sonali Bank Limited by Emerging

Credit Rating Ltd. are as follows on the basis of long and short term basis that was given
to the Sonali Bank Limited by the credit rating agencies:

Long-Term Ratings
Rating Definition
AAA An institution rated AAA has an exceptionally strong capacity to meet its financial
commitments and exhibits a high degree of resilience to adverse developments in the
economy, and in business and other external conditions. These institutions typically
possess a strong balance sheet and superior earnings record.
A- An institution rated A- has a strong capacity to meet its financial commitments but is
somewhat more susceptible to adverse developments in the economy, and to business
and other external conditions than institutions in higher-rated categories. Some minor
weaknesses may exist, but these are moderated by other positive factors.

Short-Term Ratings
Rating Definition
ECRL-1 An institution rated ECRL-1 has a superior capacity to meet its financial
commitments in a timely manner. Adverse developments in the economy and in
business and other external conditions are likely to have a negligible impact on the
institution`s capacity to meet its financial obligations.
ECRL-2 An institution rated ECRL-2 has a strong capacity to meet its financial commitments

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in a timely manner; however, it is somewhat susceptible to adverse developments in
the economy, and in business and other external conditions.

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 Chapter-03
Conceptual Framework Regarding Non-Performing Loan

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3.0 Conceptual Framework Regarding Non-Performing Loan
Non-performing loans (NPLs) have been widely used as a measure of the asset quality
among lending institutions and are often associated with failures and financial crises in
both the developed and developing world. All banks need a loan classification or grading
system to facilitate the monitoring and management of credit risk in their loan portfolios.
A bank’s loan portfolio can be classified into five major categories namely, in order of
deteriorating status, pass, special mention, substandard, doubtful and loss. Empirical
studies have identified a mixture of macro-economic and institutional factors that affect
NPLs. GDP growth, inflation and interest rates are common macro-economic factors,
while size and lending policy are micro-economic variables.
These variables are by no means exhaustive, but they provide a useful framework for
monitoring the development of NPLs. On the other hand, had focused on the degree of
loan concentration in various sectors, and proposed that vulnerabilities within sectors of
high loan concentration tend to exacerbate the NPL ratio.
“Nonperforming loans (“NPLs”) refer to those financial assets from which banks
no longer receive interest and/or installment payments as scheduled. They are
known as non-performing because the loan ceasesto “perform” or generate income
for the bank”

NPLs are viewed as a typical byproduct of financial crisis; they are not a main product of
the lending function but rather an accidental occurrence of the lending process. One that
has enormous potential to deepen the severity and duration of financial crisis and to
complicate macroeconomic management this is because NPLs can bring down investors
‘confidence in the banking system, piling up unproductive economic resources even
though depreciations are taken care of, and impeding the resource allocation process.

3.1 Categories of Loans and Advances

According to the master Circular: Loan classification and provisioning (BRPD Circular
No. 14) loans and advances of commercial banks in Bangladesh are grouped into four (4)
categories for the purpose of classification these are (Bangladesh Bank, 2014), -
a) Continuous Loan: The loan accounts in which transactions may be made
within certain limit and have an expiry date for full adjustment will be treated as
Continuous Loan. Examples are- Cash Credit, Overdraft, etc.

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b) Demand Loan: The loans that become repayable on demand by the bank
will be treated as Demand Loan. Such as Forced Loan against Imported
Merchandise, Payment against Document, Foreign Bill Purchased, and Inland Bill
Purchased, etc.
c) Fixed Term Loan: The loans, which are repayable within a specific period
under a specific repayment schedule, will be treated as Fixed Term Loan.
d) Short-term Agricultural & Micro-Credit: Short-term Agricultural Credit
will include the short term credits as listed under the Annual Credit Program issued
by the Agricultural Credit and Financial Inclusion Department (ACFID) of
Bangladesh Bank. Short-term Micro-Credit will include any micro-credits not
exceeding an amount determined by the ACFID of Bangladesh Bank from time to
time and repayable within 12 (twelve) months, be those termed in any names such
as Non-agricultural credit, Self-reliant Credit, Weaver's Credit or Bank's individual
project credit.

3.2 Basis for Loan Classification

Bangladesh Bank determined the loan classification criteria through the master Circular:
Loan classification, provisioning (BRPD Circular No. 14), loans, and advances of
commercial banks in
Bangladesh are to be classified into the following (Bangladesh Bank, 2018), -

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Table: Status of NPL for Different types of Loans
Type of Loan Period Overdue Status o Rate of Provision
Classification f

Continuous Loan -Less than 6 months Unclassified 1% (except SE&CF)

(OD/CC, PC, LIM, 2% (for SE&CF)
LTR etc.).
Overdue period will
be counted from the -3 months or more SMA 5%
day following the but less than 6
date of expiry of months
such loan. -6 months or more Sub-standard 20%
but less than 9
months
-9 months or more Doubtful 50%
but less than 12
months
-More than Bad/Loss 100%
12
months

Demand Loan -Less than 6 months Unclassified 1% (except SE&CF)

(Forced LIM, -3 months or more but SMA 2% (for SE&CF)5%
BLC/ less than 6
PAD, IBP, months
FBP etc.). Overdue -6 months or more Sub-standard 20%
period will be counted but less than 9
from the day Months
following the date of
expiry of such loan.

-9 months or more Doubtful 50%

but less than 12
Months

-More than 12 Bad/Loss 100%

months
Term Loan -Less than 6 months Unclassified 1% (except SE&CF)
Overdue period will
be counted from the -More than 3 months SMA 2% (for SE&CF)5%
day following the 20%
expiry of the due date
of payment of

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 installment of such -More than 6 months Sub-standard 50%
loan.
-More than 9 months Doubtful/Bad/Loss 100%

STAC / Micro -Less than 12 months Unclassified 5%

Credit
Overdue period will -12 months or more Sub-standard 5%
be counted but less than 36
from six (6) months months
following
the expiry of the due
date of
payment of
the -36 months or more Doubtful 5%
installment of such but less than
loan

-60 months Bad/Loss 100%

More than 60 months

Source: Banking Regulation & Policy Department, circular no. 14,(Master Circular:
Loan Classification and Provisioning), September 23, 2014, Bangladesh Bank.

3.3 Maintenance of Provision

a) General Provision: Banks will be required to maintain General Provision in the
following way.
 At 0.25% against all unclassified loans of Small and Medium Enterprise (SME)
as defined by Bangladesh Bank from time to time and at 1% against all
unclassified loans (other than loans under Consumer Financing, Loans to
Brokerage House, Merchant Banks, Stock dealers etc., Special Mention Account
as well as SME Financing.)
 At 5% on the unclassified amount for Consumer financing whereas it has to be
maintained at 2% on the unclassified amount for (i) Housing Finance and (ii)
Loans for Professionals to set up business under Consumer Financing Scheme.

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  At 2% on the unclassified amount for Loans to Brokerage House, Merchant
Banks, Stock dealers, etc.
 At 5% on the outstanding amount of loans kept in the 'Special Mention Account'.
 At ar1% on the off-balance sheet exposures. (Provision will be on the total
exposure and amount of cash margin or value of eligible collateral will not be
deducted while computing off balance sheet exposure.)
b)Specific Provision: Banks will maintain provision at the following rates in respect of
classified Continuous, Demand and Fixed Term Loans:
 Sub-standard: 20%
 Doubtful: 50%
 Bad/Loss: 100%
c) Provision for Short-term Agricultural and Micro-Credits:
 All credits except 'Bad/Loss' (i.e. 'Doubtful', 'Sub-standard', irregular and regular
credit accounts): 5%
 Bad/Loss’: 100%
 Provisions to Cover All Expected Losses

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 Chapter- 04
Loans and Recovery System (Sonali Bank Limited)

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4.0 Loans and Recovery System (Sonali Bank Limited)
4.1 Loan Disbursement principles:
Principle of Liquidity:
The banker while making advance must see to it that the money lent is not locked up for
a long time because, majority of bank’s liabilities are payable either on demand or after
short notice. So the banker should make sure that the loans are liquid enough to meet the
banks liability structure. Liquidity means availability of money on short notice. The
liquidity of advance means its repayment on demand on due date or after a short notice.
The loan must have fair chances of repayment according to repayment schedule.
Otherwise, the liquidity position of a bank may be threatened.

Principle of Security:
The security offered by a borrower for an advance is insurance to the banker. It serves as
the safety value for an unforeseen emergency. So another principle of sound lending is
the security of lending. The security accepted by a banker to cover a bank advance must
be adequate, readily marketable, easy to handle and free from any encumbrance.

Principle of Profitability:
Commercial Banks obtain funds from shareholders and if dividend is to be paid on such
shares it can only be paid by earning profit. Even in the case of public sector banks
although they work on service motive they also have to justify their existence by earning
profit. This is not possible unless funds are employed profitability. So the fund should be
employed in reliable and profitable sources. But for the sake of profitability, the other
two principles safety and liquidity cannot be sacrificed.

Principles of diversification:
The advance should be as much broad based as possible and must be in conformity with
the deposit structure. The advances should not be in one particular direction/ industry/
activity or one or few borrowers because adversity faced by that particular industry will
have serious adverse effect on the bank.

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Principle of National Interest:
The development of banking has reached a stage where a banker is required is to identify
his business with national policies. Banking industry has significant role to play in the
economic development of a country.

4.2 Creditworthiness of a borrower:

Character:
 To determine whether the borrower has a responsible attitude towards borrowed
funds and whether he will have every effort to repay what is owed.
 Responsibility, truthfulness, serious, and serious intention to repay loans make up
the characters of the borrower.
Capacity:
 Whether customer requesting loan has the authority to request loan and have the
legal standing to sign loan agreement and documents.
Economic Condition/ assets:
 Whether borrower has sufficient assets to repay the loan.
 Other loans and liabilities of the borrower.
Credit Habit:
 Whether loans borrowed by the customers previously and how those earlier loans
were handled.
 Whether there is any loan default earlier.
 Whether legal action has ever been taken against him for re recovery of default
loan
Credit Rating:
 Credit rating of the borrower by the credit rating agencies.
Credit Rating of the banks:
 As per Bangladesh Bank’s mandatory requirement vide BRPD circular No. 06
dated 05 July, 2006, credit rating of Sonali Bank Limited was done by the
Emerging Credit Rating Ltd.

4.3 Credit Risk Assessment:

A through risk assessment should be conducted prior to the sanctioning of credit
facilities. Thereafter it should be done annually for each relationship. The result of this

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assessment shall be presented in the credit proposal originated from the relationship
manager (presently branch)
The relationship Manager (presently head of branch) should be the owner of the
customer relationship and must ensure the accuracy of the entire proposal submitted for
proposal. Relationship Manager must be familiar with the bank’s lending guidelines and
should conduct due diligence on the borrower, principles and guarantors. They must
conduct necessary KYC (Know your customer) part on the customer and money
Laundering Guidelines be adhered to.
Following risk areas in the credit proposal should be addressed and assessed before
sending to Head Office:
 Borrower Analysis:
i. Share holding
ii. Reputation
iii. Education
iv. Experience- Success history
v. Net worth
vi. Age etc.
 Industry Analysis:
i. Industry Position/ Threat/ Prospect
ii. Risk factors pertaining to the industry
iii. Borrower’s position/ share in the industry
iv. Strength, weakness of the borrower compared to the competitors etc.
 Supplier/ Buyer Risk Analysis:
i. Concentration on single/ few buyer/ supplier is addressed.
 Demand Supply Position
 Technical feasibilities/ Infrastructural facilities
 Management Teams competence
 Seasonality of demand
 Debt-Equity Ratio
 Historical financial Analysis:
i. An analysis of 3 years historical financial statements
ii. Earning its sustainability
iii. Cash flow

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  Projected Financials:
i. Sufficiency of cash flows to service debt payment
ii. Debt service coverage ration

Trade Checking.
Account conduct:
i. A current valuation of collateral security by professional enlisted surveyor be
obtained with photograph and site map. Collaterals within command area of
the respective branch location are performed. Third party property and vacant
land should be discouraged.
ii. Loans should not be considered based solely on collateral.
iii. Adequacy and extent of insurance coverage should be assessed. Insurance
policy should be obtained from approved insurance company. Premium
should be paid through bank, duly stamped money receipt is obtained, and
insurance policy is held by the bank. The policy is renewed in time.

Succession Issue:
Margin, volatility of business, high debt ( Leverage/ Gearing ), over stocking, huge
receivables with long aging, rapid expansion, new business line, management change,
lack of transparency should be assessed.
Adherence to credit guidelines:
It should be clarified whether the customer is agreeable to comply with the guidelines in
respect of regulatory requirement and Bank’s policy statement.
i. Any deviation be clearly identified and maintained
ii. Risk factors be identified and side by side mitigating factors of those risks
should also be mentioned to justify the proposed facility.
iii. Employment generation and contribution to the national economy.

Credit Principles:
i. The bank shall provide suitable credit services and products for the market in
which it operates. Product innovation shall be a continuous process.
ii. Loans and advances shall normally be financed from customers deposit and
not out of temporary fund or borrowing from money market.

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 iii. Credit facilities shall be allowed in a manner so that credit expansion goes on
ensuring quality i.e no compromise with the Bank’s standard of excellence.
Credit is extended to customers who will complement such standards.
iv. All credit extension must comply with the requirement of Bank’s
Memorandum and articles of Association, Bank companies Act as amended
from time to time, Bangladesh Bank’s instructions circulars, Guidelines and
other applicable laws, rules and regulations.
v. The conduct of the loan portfolio should contribute, within defined risk
limitation, to the achievement of profitable growth and superior return on the
Bank’s capital.
vi. Credit advancement shall focus on the development and enhancement of
customer’s relationship and shall be measured on the basis of the total yield
for each relationship with a customer ( on the global basis ), though
individual transactions should also be profitable

4.4 Process of Loan recovery in short:

Recovery plan is one of the components of performance plan. It is a future intended
action in respect of recovery. In other words, it is a conscious and deliberate effort to
recover all current dues and overdue loans.
Days Past Collection Action
Due
1-14 Soft call requesting Payment

15-29 1st reminder letter

30-44 2nd reminder letter + single visit

45-59 i. 3rd reminder letter

ii. Group visit by team member
iii. Follow up over phone
iv. Letters to guarantor, Employer, and reference all above
effect follows.
v. Warning on legal action by next 15 days.
60-89 i. Call up loan
ii. Final reminder & serve legal notice.

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 iii. Legal Proceedings begin
iv. Repossession starts
90 and above i. Telephone calls/ Legal proceedings continue
ii. Collection effort continues by officer and agent
iii. Letter to different banks/ association.

4.5 Loan Classification- Provisioning:

Classification:
Classification of loan is mandatory for all scheduled commercial banks. It has become
obvious due to the bad culture of fabricating the income by window dressing of the
financial statement of the commercial banks. It has been observed that sometimes bank
income is being calculated by showing the unrealistic expected income. To protect this
ill practice, Classification of loan has come to the effect basing upon a standard criterion.
Loans are classified into three categories or the basis of the length of overdue. These are:
i. Substandard: If the loan remains overdue for 3 month and above.
ii. Doubtful: If the loan remains overdue for 6 months and above.
iii. Bad or Loss: If the loan remains overdue for 9 months and above.

The criteria of loan classification are:

i. Overdue
ii. Required Payment
iii. Limit Overdrawn
iv. Legal action
v. Qualitative Judgment.

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 Chapter-05
Loans and Advances of Sonali Bank Limited

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5.0 Loans and Advances of Sonali Bank Limited (Motijheel Branch)
Like other brunches of Sonali bank Limited. Its Motijheel Brunch which was set up in
the urgan district of Dhaka. Its close to the governement offices and courts makes it very
important for its customers. The analysis of the brunch is described below

5.1 Loans & Advances:

Principles of loans and advances:
All lending will be adequately secured with requirements as lay down by the head office
Credit committee:
- Loans and advances shall be normally funded from customers deposit of a
permanent nature, and not out of short-term temporary funds or borrowing from
other banks or through short-term money market operations.
- Credit Evaluation will include:
i. Prevalent credit practices in the market place.
ii. Credit worthiness, background and track recorded of the borrower
iii. Financial standing of the borrower supported by financial statement and other
documented evidence.
iv. Legal jurisdiction and implications of applicable laws
v. Effect of any applicable regulations and laws
vi. Purpose of the facility
vii. Tenure of the facility
viii. Tenure of the loan
ix. Viability of the business proposition
x. Cash flow projections
xi. Quality and adequacy of security, if available
xii. Risk taking capacity of the borrowers
xiii. Entrepreneurship and managerial capacities of the borrower
xiv. Reliability of the sources of repayment
xv. Volume of risk in relation to the risk taking capacity of the bank company
concerned.
xvi. Profitable of the proposal to the bank or company concerned.
Exception will require approval of the board of Directors.
For investigation the manager have to enquiry about:

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 i. Who is the borrower?
ii. Nature of business
iii. Location/ Site business
iv. Living standard/ Living style of the borrower
v. Experience if the business
vi. Equity in the business
vii. Purpose of borrowing
viii. Duration of loan
ix. Source of repayment
x. Means and security offered
xi. Physical verification of security
xii. Profitability of the transaction
xiii. History of accounts operated by borrower
xiv. Market reputation regarding character, honesty, integrity etc.
Sources of credit Investigation:
The following are the sources of credit information:
i. Loan application
ii. Financial statements ( Profit and Loss account, Balance sheet, Cash flow
statement )
iii. Study of accounts
iv. Market reputation
Other Sources:
i. Income tax statement
ii. Registration office
iii. Press report
iv. Revenue and municipal rent receipt register of joint stock company
v. VAT return
vi. Report from CIB
vii. Confidential report from fellow banks.
viii. FSSA
ix. Personal interview
x. Personal visit

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5.2 Preparation of Credit Report:
On the basis of investigating the branch manager will prepare a credit report as per
format provided by their head office. After preparing credit report banks ask for loan
documentation.
Loan Documentation:
As other commercial banks one of the main functions of Sonali bank is to extend credit
facilities of its valued customers. The credit facilities are given against types of
securities. These are mainly:
i. Personal i.e credit worthiness of the proposed borrower and guarantor.
ii. Moveable i.e FDR, Sanchaypatra goods and commodities balance of deposit
etc.
iii. Immovable i.e land building etc.
Before rendering credit facilities bank has to create charge over the securities through a
number of agreements papers etc. Which are called documents.

What is a Document?
Section 3 of evidence act-1872 states, `Documents means any expected or described up
on any substance by means of letters, Figures or marks or more than one of those means
intended to be used for the purpose of recording that manner’.
Purpose of Document:
The entire purpose of the document is that reliance can be place up on the truth of the
statement contains in them. Mainly three questions may be examined when document is
produced in the court. These are:
i. Is the document genuine?
ii. What is it’s contain?
iii. Are the statements in the document true?
The documents should correctly be taken by the bank in order to create charges on the
securities defectively in favor of the bank the proper and correct documentation is
essential from the point of view of the safety of the banks interest.
Steps of the Documentation:
For proper and correct documentation a banker has to go through the following steps:
i. Prepare a list of require document
ii. Verify the legal capacity of the executor

Page | 31
 iii. Affix properly valued adhesive stamp or type on a duly stamped paper
iv. Execution
v. Registration
Loan Issue:
i. Current issue trade license
ii. Tax receipt copy
iii. Property tax receipt copy
iv. Tax broad application for proper paid tax
v. One Sonali bank account
vi. Three copy photo
vii. Two guarantors
viii. Fixed property or business document ( original copy will be submitted in to
the bank)
Loan Issue Process:
i. Loan holder application
ii. Bank application
iii. Loan proposal of the business product or the property
iv. Enterprise valuation up 1 to 6 month
v. Loan holder detail information
vi. Bank will be verifying the information
vii. Property verification
viii. Application sends to the head office
ix. Head office send to the Bangladesh bank for inquiry of the loan holder
x. Bangladesh Bank sends to the loan holder
xi. Head office sends the list of the document which is required
xii. The bank collects the entire document to the loan holder and sends to the
head office
xiii. Insurance of the loan and its copy
Loan Renewal:
The Sonali Bank ltd. Offered by the customer to the consumer credit loan which is the
maturity date in the one year so loan holder renewal their loan , the renewal of the loan
takes some steps:
i. Application of the loan holder
ii. Inquiry of the Bangladesh Bank, Credit information bureau (CIB)
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 iii. Inquiry of the loan issue bank
iv. Current trade license
v. New valuation copy of business product
vi. Bank application
vii. New insurance copy
viii. Document sanction for the head office is send for new loan issue time
ix. Bank authority letter
x. Valuation of the property which is doing by the bank and loan proposal form.

5.3 Classification on the basis of time:

Continuous loans:
These are the advances having no fixed repayment schedule but have a date which it is
renewal able on satisfactory performance of the clients. Continuous loan mainly includes
`Cash credit both Hypothecation and Pledge’ and ` Overdraft’.
Demand Loan:
In opening letter of credit the clients have to provide the full L/C amount in foreign
exchange to the bank. To purchase this foreign exchange, bank extends demand loan to
the clients at stipulated margin. No specific repayment date is fixed. However, as soon as
the L/C documents arrive, the bank requests the clients to adjust their loan and to retire
the L/C documents. Demand loans mainly include ` Payment against documents Loan
against imported merchandise and `Letter of trust receipt’ but this type of loan is not
available in Sonali bank Limited Dhanmondi Corporate branch.
Term Loans:
These are the advances made by the bank with a fixed re payment schedule. Term loans
mainly include `Consumer credit scheme’ `Rural Credit Development Loan’ `Short loan
project’, and `staff loan’. The term loans are defined as follows:
i. Short-term loan: up to 12 months.
ii. Medium term loan: More than 12 months & up to 36 months.
iii. Long-term loan: More than 36 months.

5.4 Classification of the loan on the basis of objective:

For internal use, banks classify the loan and advance on the basis of how much the bank
is secured in respective of the loan. Monitoring can be done through loan classification.

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Loan is mainly classified to understand that which loan account are performing well and
which are not. In classifying the loan and advance there are four classes in the loan
review practiced in SBL. They are as follows:
Unclassified:
The loan account is performing satisfactory in the terms if its installment and no overdue
is occurred.
Classified:
The loan account is not performing satisfactorily in the terms of installments and overdue
is occurred. These types of loan need close monitoring to stop the deteriorating position.
Substandard:
The main criteria for a substandard advance are that despite these technologies or
irregularities no loss is expected to be arise for the bank. These accounts will require
close supervision by management to ensure that the situation does not deteriorate further.
Doubtful:
This classification contains where doubt exists on the full recovery of the loan and
advance along with a loss is anticipated but cannot be qualifiable at this stage. Moreover
if the state of the loan accounts falls under the following criterion can be declared as
doubtful loans and advanced.
Bad and Loss:
A particular loan and advance fall in this class when it seems that this loan and advance
is not collectable or worthless even after all the security has been exhausted. In the
following table the criteria to be fulfilled to fall in this category are summarized:

Substandard Doubtful Bad and Loss

3 months and above but less 6 months and above but Not recover within more
than 6 months less than 9 months. than 9 months.

Types of Loan offered by the Sonali Bank Motijheel Branch:

i. Industrial Project loan SME Loan
ii. Small cottage industries loan
iii. Working capital loan
iv. House building loan
v. Consumer credit special small loan

Page | 34
 vi. Personal Loan . These are described below here

 Mid-term loan:
Considering the capital structure, constitution and liquidity requirement, sonali bank
allows short-term loans. Mid –term loans are sanctioned for the period more than one
year and up to five years. Both modern banks have state lending a safe proportion of
their demand and time liabilities for fairly long periods to house building, industrial,
Agricultural, Transport and many other sectors. Such loans are repayable by installments
over a number of years ranging from 2 to 12 as far as, nature and conduct are concerned.
 Demand loan:
This is the fixed type of lending in its original form. The entire amount is paid to the
debtor at one time, either in cash or by transfer to his saving account. On subsequent
debit is ordinarily allowed except by way of interest, incidental charges, insurance
premium, expense incurred for the protection of security etc. A separate ledger id used
for the maintenance of this account and as no subsequent withdrawal is allowed, no
cheque is issued into this account.

 Small loans:
It refers to the lending allowed to small traders; cottage industries, small- scale industries
and self employed persons. The maximum ceiling for this loan is at present is tk.5000.00
for small traders and self employed persons, tk.2, 00,000.00 for cottage industries and
small-scale industries. Such loans are generally productive/ development oriented rather
then security oriented & this is the way of emphasis in these case is on the purpose of the
advance as well as skill reputation capacity of the borrower. The security requirements
are substituted the end-use and frequent supervision of the credit.
 Staff Loan:
Staffs of sonali Bank are provided with ‘Staff Loans” for buying motorcycles and
bicycles, for wedding of their sons or daughter etc. Bank provides this advance facility
under installment system. The amount of loan is recovered from their monthly salary.

 House building loans:

Sonali bank provides long term advances for building residential house. Advances for
construction of residential houses against real estates as primary securities as allowed by
banks up to tk.5.00 lacks per party (including cost of land) minus any loan taken from
Page | 35
HBFC for these purpose. The rate of interest for “house Building Loans’ is 16% per
annum and maximum repayment period is 12 years. In such cases, parties have to pay
down payment of 30% of the total amount and rest of the amount should be repaid within
2 years.
 Purchase & discount of bills:
Sonali bank normally purchase demand bills of exchange that are called “Drafts”
accompanied by documents of title to goods such as Bill of Lading, Railway or Truck
receipt. It is a special kind of advance. Sonali bank purchases “Bills of Exchange” that
would be matured after a certain period and not payable on demand or sight. This is
termed as discounting a bill and the charge recovered by Bank for this is called
“Discount”.
 Consumer loans:
The main purpose of the scheme is to improve life standard of the consumers by
providing them loans for purchasing house hold items, for example, computer, television,
freeze, motor car & cycle, air- condition & cooler, furniture etc. Various commercial
banks offering various types of loans to the consumer so that they can enjoy these
innovations and fixed a very easy installment process to repay that money.
Sonali Bank is offering loan calling Consumer Credit scheme in various types of goods.
 Transport loan:
Genuine transport businessmen are allowed advances for “power-Driven Vehicles”
(PDV) including water crafts against hypothecation at 30% margin and suitable
guarantee from persons and sufficient collateral.
In case of acceptance of mortgage, the minimum margin may be reduced up to 10%.
These loans should be repayable within maximum period of two years, which is subject
to renewal with approval from head office.
 Personal Loans:
The main purpose of the scheme is to improve life standard of the customers by
providing them loans for purchasing house hold items, for example, computer, motorcar
& cycle, air-condition & cooler, furniture etc. Various commercial banks offering
various types of loans to the customer so that they can enjoy these innovations and fixed
a very easy installment process to repay that money.
Sonali Bank, Motijheel Branch is offering loan calling consumer credit scheme in
various types of goods.
The features of this scheme are:
Page | 36
 i. Interest rate in this scheme is 13.5%
ii. The maximum amount to be sanctioned is TK.4,00,000
iii. Margin is 25%
iv. Security
- Purchased goods/ Products are hypothecated.
- A third party guarantor
v. Time limit is up to 4 years.

5.5 Credit Structuring:

Credit structuring means determination of loan tenure, it pricing, repayment mode,
covenants, security and others. There are various types of credit in this banking. Each
type of credit requires unique credit structuring. Short term credit structuring is different
from term loan structuring. In case of short term loan, repayment generally made on the
expiry of its tenure. On the other hand, term loans are related with the earning power of
the borrowers. Hence, in this case repayments are generally ma\de on the installments
basis. Pricing of loan also differ from loan to loan in case of short term loan, inventory or
working assets and for long term loan immovable assets are generally taken as collateral.
In credit structuring, credit officer have to be careful because logically un-sound credit
structuring might results the non-performing loans. Some factors that credit officers have
to keep in mind those are:
i. How many year borrowers want to use the loan money?
ii. When they want to repay it?
iii. Ability of the borrower
iv. Security are belongs to the borrower
v. Interest rate of loan

5.6 Credit Investigation:

A credit officer confirms after interviewing that the amount and the purpose of the loan
falls within the bounds of the bank’s lending policy and the loan meets the bank’s most
basic lending criteria, the next step of credit is credit investigation. Credit investigation is
the process of enough information from different source to determine the loan
applicant’s willingness and capacity to service the proposed loan. Upon completion of
credit investigation, the loan officer have a sufficient idea of the client’s reputation

Page | 37
character and experience; the company’s past and present record and probable future
performance. Credit officer has done most credit investigation activities.

5.7 Credit Approval:

This branch usually follows either committee or sequential process of credit approval.
Under credit committee system, the credit officer of the branch where borrowers applied
makes necessary appraisal and sent it to the committee for the sanction. Credit
committee examines the credit officer proposal and makes decisions whether approve it
or not. On the other hand, sequential process involves an approval chain of individual
credit officers with ascending levels of authority. There are debates about superiority of
the system. Proponents of the committee system argue that it provides the maximum
level of decision-making capability because it combines experience of the committee
members. The sequential process proponents claim that the committee customarily
formed by the senior members of management and head of the lending areas. In most
cases committee decision are made without allowing sufficient time to analyze
applications. On the other hand, sequential process gives the every loan officer an
opportunity to examine the loan application, ask pertinent questions, and make
independent end decision. In committee system the responsibility of committee members
cannot be assigned. Decisions are made by voice vote or raising hands. In sequential
process accountability can be attributed more easily which compel them to be more
responsible in decision making. Banks in Bangladesh follow the committee system for
loan approval.

5.8 Recovery:
Loans and advances in whatever from granted by the bank to its clients are repayable
either on demand or at the expired of fixed period or as per payment schedule agreed
upon while granting the facilities. If a loan is repayable on installment is not repaid on
due date. Overdraft and credit are legally repayable on demand, although the bank
seldom excises the right but in certain customers. In case loan is repayable in
installments and default causes in the payment of any installment, entire loan usually
become immediately recoverable of at the option of the bank.
i. If death occurs either of the borrower or of the guarantor.

Page | 38
 ii. If the borrower is reported to have committed as act of insolvency or has filed
an application for his insolvency.
iii. Dissolution the partnership
iv. Liquidation the borrowing company
v. Failure to renew the documents sufficient before the expired of the limitation
vi. If there is any serious deterioration in the security charged to the bank and
want of satisfactory in the account
vii. There has been deterioration in the financial position of the party
viii. If the borrower fails to maintain the stipulated margin and does not restore the
shortfall inspire of reputed remainders
ix. Change in the bank’s policy of lending
x. The policy of selective credit control by Bangladesh Bank
xi. Detection of any other undesirable feature in the account
xii. There may also be other reasons for withdrawing the facility, i.e the law and
order situation at ascertain place is such that it may be risky to the advance.
If credit officer fail to recover credit then bank have no alternative rather than taking
legal action against borrower loan. Now bank can take action against borrower by the
law of Artha Rin Adalat Act.

5.9 Credit Program

General and Industrial Credit:
Sonali Bank Limited has formulated its policy to give priority to small and medium
business while financing large scale enterprise through consortium of banks total loan
and advance. Following the guideline of Bangladesh Bank, credit facilities have been
extended to productive and priority sectors. In extending credit facilities, the bank has
given due importance to sectorial needs and requirements of both public and private
sectors. Major sectors include Jute, Textile industries 7 trade, Steel & Engineering, Food
& Allied, and export import etc. Dhanmondi Corporate Branch provides credit two types
in this sector first one is Term loan another one is working capital, This branch provides
as a term loan to large and medium industry at the rate of 13% and to small industry also
13% as a interest. On the other hand they provide as a working capital to large and
medium industry at the rate of 13% and to small industry also 13% as a interest.

Page | 39
SME financing scheme:
Small and Medium enterprise (SME) financing scheme has been introduced to provide
new or experienced entrepreneurs to invest in small and medium scale industries. Small
business development loan, Gharoa project, credit for forestry/ Horticulture/ Nursery,
Crop loan project all are designed for this purpose. The interest rate will differ base on
the loan category but in terms in common sense it provides SME financing scheme at the
rate of 13% as an interest.

Women Entrepreneurs Development Scheme:

Women entrepreneurs’ development scheme has been introduced to encourage women in
doing business. Under this scheme, the bank finances the small and cottage industry
projects sponsored by the women. This branch mainly called Dhanmondi mohila branch
so in accordance with that, in order to improve the women condition they provide loan as
women entrepreneurs development scheme, in this sector they charges 12% as a interest.

Page | 40
 Chapter-06
Analysis of Non Performing Loans of Sonali Bank Limited

Page | 41
6.0 Analysis of Non Performing Loans of Sonali Bank Limited
(Motijheel Brunch )
Non performing loans and Provisions for those loans from doferent sectors are provided
here for Sonali Bank Limited Motijheel Brunch for the last 5 years. These analysis will
show the overall trend of the non perfroming loans and provisions for Sonali Bank
Limited.

6.1 Non Performing Loans

Year 2014 2015 2016 2017 2018
Non Performing 24.02 23.77 29.59 27.70 27.59
loans

Non Performing Loan Trend

Non Performing Loan
35

30

25

20

15

10

0
2014 2015 2016 2017 2018

Over the last 5 years the Non performing loans for Sonali Bank Limited has been fairly
consistant. After the scnadal and others the bank has taken measure to make sure that the
history doesnot repeat itself. From the year 2014 the non performing loans has increased
till 2016 then it has faily consistant for the past two consucative years .

Page | 42
6.2 Provitions for Loans and advances
Year 2014 2015 2016 2017 2018
Provitions 20,28,253 17,14,063 28,03,163 27,51,765 27,54,128
for Loans
and
advances

Provisions for loans and advances

30

25

20

15

10

0
2014 2015 2016 2017 2018

Provisions for loans and advances

Provsions for loans and advances were taken by management of the brunch of Sonali
Bank limited for the non performing loans.the provisions were quite matches the the
amount of non performing loans in the brunch. These activities taken were according to
the norms and principle of Sonali Bank Limted. For Sub- Standard loans the rate in 25%,
for Doubtful the rate is 50% and for Bad and lose the rate is 100%.

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6.3 Net Profit after Tax of Sonali Bank Limited (Motijheel Brunch )
Year 2014 2015 2016 2017 2018
Net 2,89,06,600 2,26,32,202 2,36,81,381 4,01,96,906 4,12,81,554
Profit
After
Tax

Net Income
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
2014 2015 2016 2017 2018

Net Income

Here we can see that the net income of Sonali Bank limited is followig an upward tread
from 2014. Despite a downfall during the year 2015 the brunch is managing a upward
trend in its income from different activities. After talking to different officers from the
Motijheel Brunch it comes into light that the overall change in the management system
from the head office and the transperancy of the overall system plays a stromg part in the
increasing trend of net income of Sonali Bank Limited Motijheel brunch .

Page | 44
6.4 Regression Analysis
Regression analysis is a statistical process for estimating the relationships among
variables. It includes many techniques for modeling and analyzing several variables,
when the focus is on the relationship between a dependent variable and one or more
independent variables. Regression analysis is widely used for prediction and forecasting,
where its use has substantial overlap with the field of machine learning. Regression
analysis is also used to understand which among the independent variables are related to
the dependent variable, and to explore the forms of these relationships. In restricted
circumstances, regression analysis can be used to infer causal relationships between the
independent and dependent variables.

6.5 Regression Analysis for Sonali Bank Limited

To conduct regression analysis for Sonali Bank Limited, it has to determine the
dependent variable and the independent variable. Here, Net Profit after Tax (NPAT) is
the dependent variable and Non-performing Loans (NPLs) and Provisions for Non
performing Loans are the independent variables.
relationship between the increase or decrease of NPLs and NPAT of Janata Bank
Limited.

Dependent
Variable Net Profit after Tax (NPAT)

Non-Performing Loans
Independent
Variable
Provision for Loans & Advances

Variable 2014 2015 2016 2017 2018

Page | 45
Net Profit 28906 22632 23681 40196 41281
After Tax
Non 2402 2377 2959 2770 2759
Performing
Loans
Provisions for 2028 1714 2803 2751 2754
Loans and
Advances

Regression Equation,

Where,
Y= Net Profit after Tax (Dependent Variable)

= The estimated regression coefficient

X1= Non-performing Loans (Independent Variable)
X2= Provision for loans and advances (Independent Variable)
= Estimated Standard Deviation
By using these model through MS. Excel the relationship between the independent and
dependent variables are discussed in the findings section of the report

6.6 Causes and Effects of Non Performing Loans

Causes of Non Performing loans
Entrepreneurs Related
 Lack of Proper business experience
Sometimes people without prior business experience want to do something. It may so
happen that after retirement from govt. or private service people want to establish a
business, which is not very relevant to his past experience. Besides his own equity
they look for bank finance. Normally banks do not finance in the projects where the
key personnel do not have enough background in that particular business. When
banks finance in the projects here the key personnel lack relevant business
experience, it becomes risky for the bank. Probability of failure in these sorts of
projects tends to be higher.

Page | 46
  Lack of Business and Lack of Institutional Training Background
Business experience is somehow related to business background. Here business
background means family business background. Though family business has a role in
entrepreneurial orientation, there is no direct relationship between business
background and business performance of loan repayment. It is true that youths
coming from business background are familiar with business and banking but there
are other ways to get oriented with the same, not necessarily one has to come from
business family.
 Unwillingness to Pay
We all know this is one of the most common reasons behind default culture in
Bangladesh. It can happen in some situations like when security-backing loan is
weak; customer feels that Page of defaulting the loan will not harm him much. In that
case he tends to default. In other cases like when cash flow from the business is not
impressive, people are unwilling repay the loans.
 Lack of Supporting Facilities
Sometimes business need support from other sources like government authority.
When cash flow is lean and the project is in lull, it needs feeding. Without further
feeding company may become sick and incur loss in consecutive time periods. In our
country most of the companies do not have the supporting sources with which they
can withstand the turmoil that comes in to their business from time to time.

BUSINESS RELATED
 Non-attractive Industry
Sometimes non-attractive industry acts as primary cause of loan default. Companies
operating in non-attractive industries have higher probability of performing poor.
Because of poor financial performance, company’s cash flow gets affected. Because of
cash flow the company becomes less liquid which contributes in defaulting bank loan.
Not necessarily that all the companies no non-attractive industry perform poor. For
example: suppose in Bangladesh Jute industry is one of the non –attractive industries.
Now any investor want to invest in this sector may be cause loss. So this investor can’t
pay the interest.

 Strong Competition

Page | 47
Strong competition does not directly contribute in defaulting loan. Strong competition
takes place when many companies enter into an industry where the industry cannot
accommodate so many companies. In strong competition only efficient players survive.
So the inefficient companies find it difficult to make profit and sale their product. Once
they fail to make profit, the company is likely to default its loan installment in the bank.
 Poor Management capability
Before sanctioning a loan banks look into the matter that how the management of the
company is. If the bank feels that the management is capable enough to successfully run
the business and Page of utilize bank finance, then bank agree to finance otherwise not.
Even sometimes banks sets conditions like some of the key personnel must not quit the
organization before repayment of the loan. Managerial capability plays vital role in
repaying bank loan. The more professional the management is, the less is the probability
of defaulting loan.
 Poor Financial Performance
Definitely poor financial performance is the most important cause of loan default. Once a
company is not solvent, it is unlikely to repay its loan. Poor financial performance is the
key reason behind maximum loan default. Poor financial performance can be arisen from
many other reasons described above. B5: Poor Cash Flow In most cases poor cash flow
is the aftermath of poor financial performance. Because of poor cash flow companies
mainly default loan. Because of irregular cash flow, business becomes unstable and
illiquid. In that case business does not have enough cash to service loans payment and
interest. Even if a company is profitable, the company may default because of cash flow.
In some cases, a business may sell most of its finished goods on credit. So it may not
have enough cash to support the loan and other debts. So it may cause default.
 Low Market Share
Low market share may be a reason of loan default but not a single respondent mentioned
it as one of the reasons of their loan default. Low market share means low sales, low
sales mean low profit and low profit results default. Operating in a niche market, having
a very low market share a firm can be profitable enough to repay its entire loan
obligation as well as retain sizable earning. But operating in niche product in a market
which is not proper or have fewer customers that it expected then it cannot be profitable.
So it cannot pay its interest payment.

LENDING RELATED
Page | 48
  Delayed Assessment of Loan Proposal
Banks sometimes make delay in assessing loan proposals of the business firms. When
the firm badly needs money, it does not get enough funds because of delayed assessment
by the bank. This infuses shortage of cash in their business operations. They hardly
manage their day-to-day business expenses let alone repayment of the loans.
 Delayed Disbursement of Fund
Even after assessment of the proposal and taking positive decision, banks do not disburse
funds until security documentation formalities are completed. As a result business do not
get fund when actually it requires it. Some of the defaulters complained about
subsequent disbursements.
 Lack of Proper Monitoring
Monitoring is one of the most important parts for financial institutions. Through
monitoring lenders come to know that whether their fund is being used for the desired
purpose or not. Sometimes disbursed money is used for purposes other than the specific
areas. In that case risk of loan default gets higher. Banks sanction loan on the basis of
feasibility of the project. Bank as a lender expect that the loan will be serviced by the
cash flow generated from that particular business. But if credit is used in some other
areas desired cash flow may not come from the business and chance of loan default gets
high. Therefore banks monitor activities of the borrower whether the fund is being
properly utilized or business is generating enough cash flow or not. Banks use
specialized formats for loan monitoring. Bank periodically review the performance of the
borrower and based on that bank decides whether to renew the facilities or not. The tools
used for monitoring are portfolio reviews, profitability analysis etc. before diverse loan,
Banks can check the credit rating of the organization. Banks can generate information
about borrowers from Bangladesh Bank. Then banks can decide how much money
investor needs and how much money he will be invested. Valuation culture of the
security or collateral is absent in many of banks. Action comes after loan monitoring.
Monitoring is done for identifying deviations or exceptions. If there is any exception
then corrective action needs to be taken. If corrective actions are taken on time chance of
default loan reduces. When Customer misses one installment, concerned officer of the
bank must visit the customer and understand where the problem lies. If proper action is
taken, probability of loan default is reduced.

MACROECONOMIC FACTORS
Page | 49
  Low GDP Growth
It is evident that companies which deal in consumer products are directly affected by the
GDP growth of the entire economy. Regular customers and defaulters have opined that
this macro indicator influences the cash generation of a company and hence the
repayment of the loan.
 Increasing Crimes
It is revealed that the effect of the increasing crimes in the business of the companies.
They think that forced subscription sometimes make the profitability of the company
lower.
 Frequent polity Changed by the Government Government
It is considered as the minor cause of the loan default as per the survey since it has a little
impact on the local sales and distribution of the products of the companies. For example:
in this budget government increase tax on mobile phones which are imported from
foreign country, so mobile phone importer may not generate expected revenue. So
importer could not par their interest payment. So they could be defaulter. Without these
are other causes such as imperfect lending practice, lack of analysis of business risks,
lack of proper valuation of security or mortgage property, undue influence by borrowers,
external pressure, loan go Govt. organization, Govt. policy for disbursement of credit,
lack of legal action.

6.7 Effect of Non Performing Loans

Effects of NPL are such as Stopping Money Cycling, Earning Reduction, Capital
Erosion, Increase in Loan Pricing, Frustration etc. As a result, the values of security are
increased and the risks of financial recession also see a rise. Amplifications of the effect
of NPL are as follows:
1. NPL can lead to efficiency problem for the banking sector. It is found by a
number of economists that failing banks tend to be located far from the most-
efficient frontiers, because banks do not optimize their portfolio decisions by
lending less than demanded.
2. There is a negative relationship between the non-performing loans and
performance efficiency. So, increase in NPL hampers the performing loan. Most
of the cases, it occurs when there is an adverse selection. Averse selection is
asymmetric information problem that occurs before the transaction. For example:

Page | 50
 big risk takers or outright crooks might be the most eager to take out a loan
because they know that they are unlikely to pay it back. Because adverse
selection increases the chances that a loan might be made to a bad credit risk,
lender might decide not to make any loans, even though there are good credit
risks in the market place.
3. NPL creates the Credit Crunch situation. Credit crunch is a phenomenon that
banks ration loan disbursement and new credit commitments in order to protect,
but add more risks. Banks treat loan as an asset. They expect return from it. If
loans become NPLs then banks have lack of fund to give loan according their
commitment or banks could give loans at their previous interest rate. Clients have
to pay more. So loans may be defaulted. Credit crunch also increases the rate of
NPL.
4. There is a cyclic relation between poor economic condition and the depressed
economic growth as follows:
 During the crisis moment, in order to restore the credibility among creditors and
depositors, failing financial institutions not only try to expand their equity bases,
but also reduce their risk assets or change the composition of the asset portfolio.
Because of such defensive actions, the corporate debtors are always targeted, thus
the economic growth is being stalled overall. Banks try to collect loans amount as
fast as possible and most of the banks have huge number of corporate clients so
they try to recover those loans as early as possible to reduce risky assets.
 Money cycling gets stopped due to increase in NPL. Slow flowing of cash always
has negative impact on any business.
 When the NPL is increased, interest earning gets stopped. But the cost of fund
and the cost of management are not stopped. To run the management cost along
with the cost of fund, the existing lending price has to be increased. Suddenly
increased rate of interest makes hard the return of bank money for a new
borrower. So rate of investment will be lower.
 NPL affects opening of LC (Letter of Credit). International importers always
choose healthy condition of the exporter's bank. Worse health condition of the
bank affects the opening of new LCs. Low rate of LCs makes low bank earning.
 NPL exists as a natural consequence of lending behavior. When banks re-balance
their portfolio, they decide on the degree of risks they will tolerate for a given
level of expected return according to their risk preference because banks have to
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keep 10% of their risk weight asset as capital or 400 cores. Banks treats loans as a
risky asset. If the risk is high, banks will expect high return. When the level of
non-performing loans goes beyond a certain point banks cannot accept, and then
it affects bank's re-balancing actions. So, when NPLs cross the boundary of the
above threshold, they start to spawn negative effects on more lending. 10. NPL
has a positive relationship with interest rate. When NPL increases, loan which is
treaded as asset becomes more risky. So that the rate of interest also increases to
get sufficient retune from the loan to cover the risk.

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6.8 Comparison of Five Bank Analysis
A tools use by individual to conduct a quantitative analysis of information in a
company’s financial statements. Ratios are calculated from current year numbers and are
then compared to previous years, other companies, the industry, or even the economy to
judge the performance of the company. Ratio analysis is predominately used by
proponents of fundamental analysis.
Ratio analysis is a study of the relationships between financial variables. It is very
important in fundamental analysis which investigates the financial health of any financial
institution. This ratio analysis gives frank financial information in this current business
world. By giving a glance anyone will be able to know what the position that institution
is now. Therefore managers, shareholders, creditor, etc. all take interest in ratio analysis.
For this reason to evaluate the performance of commercial banks the ratio analysis has
been selected. Here in this report contains the most common ratios and analyze to
evaluate the performance of seven commercial banks in Bangladesh and over the year
2018 to 2014. To do Analysis following ratio have been calculated:

Flow chart 4.1: Ratio analysis

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6.8.1 Return on assets (ROA): Return on assets) is an indicator of how profitable a
company is relative to its total assets. ROA gives a manager, investor, or analyst an idea
as to how efficient a company's management is at using its assets to generate earnings.
Return on assets is displayed as a percentage.Here is ROA of the five state owned
commercial Banks in Bangladesh for the last 5 years given below table with graphical
representation:

Calculation:
Bank Name Year
2018 2017 2016 2015 2014
Sonali Bank 3.3% 1.32% 2.53% 0.65% 2.54%
Agrani Bank 0.54% 0.69% 0.77% 0.86% 1.34%
Janata Bank 0.6% 0.9% 0.7% 0.5% 1.1%
Rupali Bank 0.79% 1.4% 1.7% 1.9% 1.4%
BDBL Bank 1.87% 2.02% 1.89% 1.13% 1.09%
Average 1.42% 1.26% 1.24% 1.04% 1.95%

Table 4.1: Return on Assets

Graphical Presentation:

Return on Assets
2.50%

2.00%

1.50%

1.00%

0.50%

0.00%

2018 2017 2016 2014

Graph 4.1: Return on Assets

Interpretation:

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In the above graph we can 2018 to 2014 Returns on Asset of the selected state owned
commercial banks in Bangladesh. In 2018, 2017, 2016 and 2015 we see the sonsli Bank
had the highest ROA of 1.87%,2.02%, 1.89%, and 1.13% and 2015 the lowest ROA of
janataBank is .05%. To compare the average with those selected banks the highest
average ROA of 1.26% earned in the year 2017.

6.8.2 Return on Equity (ROE): Return on Equity is a measure of financial performance

calculated by dividing net income by shareholders' equity. Because shareholders' equity
is equal to a company’s assets minus its debt, ROE could be thought of as the return on
net assets. ROE is considered a measure of how effectively management is using a
company’s assets to create profits. Here is ROE of the five state owned commercial
Banks in Bangladesh for the last 5 years given below table with graphical representation:

Calculation:

Bank Name Year

2018 2017 2016 2015 2014

Sonali Bank 17.5% 16.5% 14.6% 7.36% 5.36%

Agrani Bank 7.65% 9.24% 14.26% 6.35% 6.62%

Janata Bank 14.36% 12.96% 6.09% 8.0% 7.7%

Rupali Bank 4.2% 12.4% 9.25% 19.4% 6.4%

BDBL Bank 8.14% 13.7% 12.09% 13.14% 8.11%

Average 10.42% 12.96% 11.25% 8.8% 6.83%

Table 4.2: Return on Equity

Graphical Presentation:

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 Return on Equity
25.00%

20.00%

15.00%

10.00%

5.00%

Sonali Bank Agrani Bank Janata Bank Rupali Bank BDBL Bank
0.00% 2018 2017 2016 2015 2014

Graph 4.2: Return on Equity

Interpretation:
In the above graph we can 2018 to 2014 Returns on Equity of the selected state owned
commercial banks in Bangladesh. In 2018, 2017and 2016 we see the Rupali Bank had
the highest ROE of 19.25%,22.14% and 22.16% and Agrani Bank had the lowest ROE
of 7.18% . To compare the average with those selected banks the highest average ROE of
15.44% earned in the year 2017.

6.8.3 Non- Performing Loan (NPL) Ratio: Financial analysts frequently use the NPL
ratio to compare the quality of loan portfolios among banks. They may view lenders with
high NPL ratios as engaging in higher-risk lending, which can lead to bank failures. Here
is NPL of the five state owned commercial Banks in Bangladesh for the last 5 years
given below table with graphical representation:

Calculation:

Bank Name Year

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 2018 2017 2016 2015 2014
Sonali Bank 4.82% 3.79% 5.13% 4.95% 4.13%
Agrani Bank 5.98% 4.01% 4.66% 5.49% 4.15%
Janata Bank 6.16% 6.40% 5.29% 6.46% 4.95%
Rupali Bank 3.11% 3.0% 3.06% 3.2% 3.8%
BDBL Bank 3.10% 3.56% 3.40% 5.99% 5.72%
Average 4.63% 4.35% 4.65% 5.42% 4.55%

Table 4.3: Non-Performing Loan

Graphical Presentation:

7.00%
Non Performing Loan
6.00%

5.00%

4.00%

3.00%

2.00%

1.00%

0.00%
Sonali Bank Agrani Bank Janata Bank Rupali Bank BDBL Bank

2015 2018 2017 2016 2014

Graph 4.3: Non-Performing Loan

Interpretation:
In the above graph we can 2018 to 2014 Non-performing Loan of the selected state
owned commercial banks in Bangladesh. In 2018, 2017, 2016 and 2015 we see the
Janata Bank had the highest ROA of 6.16%,6.40%, 5.29%, and 6.46% and 2017 the
lowest Non-performing Loan of Pubali Bank is 3.0%. To compare the average with those
selected banks the highest average Non-performing Loan of 5.42% earned in the year
2015.

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6.8.4 Debt to Equity Ratio: Debt to equity ratio is a liquidity ratio that compares a
company’s total debt to total equity. It shows the percentage of company financing that
comes from creditors and investors. A higher debt to equity ratio indicates that more
creditor financing (loans) is used than investor financing (shareholders).Here is Debt to
Equity Ratio of the five state owned commercial Banks in Bangladesh for the last 5 years
given below table with graphical representation:

Calculation:

Bank Name Year

2018 2017 2016 2015 2014

Sonali Bank 14.60 13.80 13.14 10.78 11.40

Agrani Bank 14.96 13.58 12.10 12.17 11.45

Janata Bank 11.7 10.3 14.3 9.3 8.7

Rupali Bank 12.3 10.1 11.3 9.1 8.4

BDBL Bank 8.97 9.74 10.59 10.93 10.52

Average 12.51 11.50 11.89 10.46 10.09

Table 4.4: Debt to Equity Ratio

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Graphical Presentation:

DEBT TO EQUITY
16

14

12
2018
2017
10
2016
2015
8
2014

0
Sonali Bank Agrani Bank Janata Bank Rupali Bank BDBL Bank

Graph 4.4: Debt to Equity

Interpretation:

In the above graph we can 2018 to 2014 Debt to Equity of the selected state owned
commercial banks in Bangladesh. In 2018 the Agrani Bank shows the highest debt to
equity ratio and the Rupali Bank had the lowest debt to equity ratio. That means the
Janata Bank had more Risky to creditors and its investor than Rupali Bank. In the year
2017 and 2016 the most debt to equity ratio 13.80 and 13.14 the sonali Bank. In the last
year 2018 the table and graph shows that continuously Agrani Bank hold in a good
position.

6.8.5 Loan to Deposit Ratio:

This ratio measures a bank’s liquidity condition. Total deposits include savings deposits, demand
deposits, term deposits and deposits of other banks. Here is Loan to Deposit Ratio of the five
state owned state owned commercial Banks in Bangladesh for the last 5 years given
below table with graphical representation:

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Calculation:

Bank Name Year

2018 2017 2016 2015 2014
Sonali Bank 97.5% 90.5% 96.7% 85.5% 86.7%

Agrani Bank 91.6% 90.6% 85.7% 84.7% 82.6%

Janata Bank 91.4% 89.5% 85.6% 83.1% 81.1%

Rupali Bank 112.8% 107.1% 100.2% 99.6% 98.2%

BDBL Bank 93.5% 93.8 % 96.9% 100.3% 84.9%

Average 97.37% 94.31% 93.02% 90.6% 86.7%

Table 4.7: Loan to Deposit Ratio

Graphical Presentation:

120.00% Loan To Deposit Ratio

100.00%

80.00%

60.00%

40.00%

20.00%

0.00%

2018 2017 2016 2015 2014

Graph 4.7: Loan to Deposit Ratio

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Interpretation:

In the above graph we can 2018 to 2014 Loan to Deposit Ratio of the selected state
owned commercial banks in Bangladesh. In 2018, 2017, 2016, 2015 and 2014 we see the
Rupali Bank had the highest loan to Deposit Ratio of 112.8%,107.1%, 100.2%, 99.6%
and 98.2% and Janata Bank had the lowest Loan to Deposit Ratio of 81.1%. To compare
the average with those selected banks the highest average Loan to Deposit Ratio of
97.37% earned in the year 2018.

6.8.6 Capital Adequacy Ratio (CAR):

The capital adequacy ratio measures a bank's financial strength by using its capital and
assets against risk-weighted assets. Generally, a bank with a high capital adequacy ratio
is considers age and likely to meet its financial obligation. Realizing the importance of
capital adequacy, the Bangladesh Bank issued directive whereby each banks in
Bangladesh was required to meet the capital adequacy standard of 10%. Here is CAR of
the five state owned commercial Banks in Bangladesh for the last 5 years given below
table with graphical representation:

Calculation:
Bank Name Year
2018 2017 2016 2015 2014

Sonali Bank 11.28% 11.93% 12.02% 11.87% 12.9%

Agrani Bank 11.84% 11.96% 11.67% 11.46% 11.20%

Janata Bank 12.63% 12.57% 11.25% 10.07% 10.14%
Rupali Bank 13.4% 14.7% 13.2% 13.2% 14.3%
BDBL Bank 15.7% 11.97% 12.06% 12.29% 15.12%
Average 13.77% 10.62% 12.64% 11.6% 12.7%

Table 4.6: Capital Adequacy Ratio

Graphical Presentation:

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 Capital Adequacy Ratio
18.00%

16.00%

14.00%

12.00%

10.00%

8.00%

6.00%

4.00%

2.00%

0.00% 2018 2017 2016 2015 2014

Graph 4.6: Capital Adequacy Ratio

Interpretation:

Capital Adequacy Ratio basically determines a bank’s capital to its risk. It is presented as
a percentage of a bank’s risk weighted credit exposures. Under the Basel III, all banks
are required to have a Capital Adequacy Ratio of at least 12%.If the national regulator
requires a capital adequacy ratio of 12% the bank is safe. In 2018 to 2014 CAR for
SonaliBank was 11.28%, 11.93%, 12.02%, 11.87% and 12.9% which was determined by
Bangladesh Bank and actually minimum requirement is 12% in 2018.Before that it was
10%.

So Sonali Bank has maintained the minimum requirement so far. In 2018 CAR of Agrani
bank was 11.84% which is lower than 12%.So they don’t maintain minimum
requirement. In 2018 CAR of Jantata Bank was 12.63% which is also greater than
12%.So they maintain minimum requirement. In 2018 CAR of Rupali Bank was
13.4%.So they maintain minimum requirement. In 2018 CAR of BDBL Bank was 15.7%
which is greater than 12%.So they goodly maintain minimum requirement so far.

6.9 Regression Analysis:

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The Regression Analysis is a statistical tool used to determine the probable change in
one variable for the given amount of change in another. This means, the value of the
unknown variable can be estimated from the known value of another variable.
Regression analysis is a set of statistical methods used for the estimation of relationships
between a dependent variable and one or more independent variables. It can be utilized
to assess the strength of the relationship between variables and for modeling the future
relationship between them. Regression analysis is all about data. It helps businesses
understand the data points they have and use them – specifically the relationships
between data points – to make better decisions, including anything from predicting sales
to understanding inventory levels and supply and demand. Of all the business analysis
techniques, regression analysis is often referred to as one of the most significant.
Regression analysis includes several variations which is given below with Flow chart:

M ulti
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Flow chart 5.2: Types of Regression analysis

linin
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To continue the analysis I choose to the multiple linear regression. The concept of
multiple linear regressions is given below:

Regr es s ion

6.9.1 Multiple Linear Regressions

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Multiple linear regression (MLR), also known simply as multiple regression, is a
statistical technique that uses several explanatory variables to predict the outcome of a
response variable. When you have more than 1 independent variable and 1 dependent
variable, it is called Multiple linear regression. The Formula for Multiple Linear
Regression Is:

yi=β0+β1xi1+β2xi2+...+βpxip+ϵ
Where, for i=n observations:
yi=dependent variable
xi=explanatory variables
β0=y-intercept (constant term)
βp=slope coefficients for each explanatory variable
ϵ=the model’s error term (also known as the residuals
Regression Statistics
Multiple R = It is the correlation between independent and dependent variables. It helps
us to illustrate the relationship between the variable. Here 1 means a flawless value of
positive correlation.

R squared =It helps us to find out the strength of the correlation between the model and
the dependent variable on a ranges from 0 to 1. It is also known as Coefficient of
Determination.

Adjusted R square =we use it when there is more than one independent variable. Here we
also assume that value 1 means the flawless value.

Standard error= It explains how well the model fits the data. It is also called that standard
error of the estimate. The less value of error helps the model fits with the sample data.

Observation = Total Observation in the sample.

ANOVA Test:

SS = It is the sum of squares

Regression MS = It is the sum of the squares of the explained deviations. It is also called
degrees of freedom.

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Residual MS = It is the squares of the unexplained deviation and also called as mean
squared error.

F =It provides the idea whether the independent variable is significant or not in a
multiple regression model.

Significant F= It is used with a combination of P value which decides the overall results
are significant.

Regression Coefficients:

Coefficient = It provides the information regarding least square estimate.

T Statistic = T value measured always along with P value. It is for the null hypothesis
V/S alternate hypothesis.

P value =For this paper P value is the most important because based on the P value the
influential factor will be determined. Here we assume that P value range 5% means the
flawless value.

Lower 95% = the inferior limit of the confidence level.

Upper 95% = the greater limit for the confidence level.

6.9.2 Analysis Result and Interpretation

As my tropic is Comparative analysis of non-performing loan and its effect on state
owned Bank sector of Sonali banks Limited we used regression model. To evaluate the
performance we need some dependent and idepe4ndent variable. Here we see return on
asset and return on equity is dependent variable and Non-performing loan, loan to
deposit and capital adequacy is independent variable. We identify the relation between
independent and dependent variable by regression analysis and also identify how much
effect the independent variables create on independent variables.

Type Variable Proxy Sign

Dependent Return on Asset Net income / Total Asset ROA

Independent Non-performing loan Non-performing loan / Total NPL

Asset

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 Independent Loan to Deposit Total loan / Total Deposit LTD

Independent Capital Adequacy (Tier 1 capital + Tier 2 CAR

Ration capital) / Total risk weighted
asset

Linear regression is a process which is used when we want to calculate the value of a
dependent variable based on the value of an independent variable. The variable we want
to predict is referred as the dependent variable or sometimes called the outcome. The
variables we are going to use to predict the value of the dependent variable are referred
as the independent variables or sometimes called the predictor .Regression analysis
creates an equation which describes the statistical relationship between one or more
predictor variables and the response variable. Multiple linear regression equation was
used to estimate the model using gretl software.

Hypothesis:

H0: There is no significant impact on Non-performing loan ratio on Profitability of

Sonali Bank Limited for 5 years.

H1: There is significant impact on Non-performing loan ratio on Profitability of Sonali

Bank Limited for 5 years.

Multiple regressions have been applied as the statistical tool to measure the impact of
Non-performing loan ratio on Profitability of Sonali Bank Limited. Here return on asset
is dependent variable while non-performing loan is used as independent variable. Loan to
deposit and capital adequacy are used as control variables.

Model R-squared Adjusted R- Std. Error Durbin-Watson

squared

1 0.976985 0.907941 0.071266 1.897773

Table 4.2: Model Summary

Table-4.2 represent that the Coefficient of determination R-squared 0.976 that showed
the highest percentage value that the independent variables explain 97 percent change of

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ROA. The goodness of fit test of the model is also excellent as the adjusted R-squared is
0.907. The value of Durbin Watson is 1.897 that lies within the range between 1.5 and
2.5. So we can easily state that there is no autocorrelation among the independent
variables of the study.

Model 1: OLS, using observations 2014-2018 (T = 5)

Dependent variable: ROA

HAC standard errors, bandwidth 1 (Bartlett kernel)

Coefficient Std. Error t-ratio p-value

const 0.0468601 0.361703 0.1296 0.9180

NPL −0.192091 0.0134946 −14.23 0.0446 **

LTD 0.0563409 0.00273519 20.60 0.0309 **

CAR −0.261744 0.0163938 −15.97 0.0398 **

Table 4.3: coefficient

From table-4.3 it is found that there is a positive value of intercept coefficient (α) means
that if all the independent variables remain constant then ROA will be 0.04686 carrying a
viable economic. Slope coefficient of NPL is -0.1921 that means if NPL ratio increases
by 1 percent then the ROA will be decreased by 0.1921 percent and it is statistically
significant at 5% percent significant level.

In case of Capital Adequacy Ratio it is found that there is inverse relationship between
ROA and CAR as ROA decreases by 0.2617 percent due to 1 percent increase CAR
where at 5 percent significance level it is accepted. Again, the slope coefficient of LTD
is 0.091 that states if NPL grow by 1 percent NII increased by 0.0563 percent that is
statistically significant at 5% significant level.

P-value:

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In regression table there is P value. This p values referred to a significance level of 5%.
The P value shows the effect of variables that there is any significant effect or not. The
p-value for each term are use to tests the null hypothesis that the coefficient is equal to
zero .A low p-value (< 0.05) indicates that you can reject the null hypothesis. Which
means the predictor that has a low p-value is very meaningful addition to your model
because any percent changes in the predictor's value (independent value) are related to
changes in the response variable (dependent variable).the result is significant .Other
hand, a larger p-value (>.05) indicates that any percentage of changes in the predictor
variable are not related with changes in the response variables.

Model Mean dependent variable S.D. dependent variable P-value(F)

1 1.018000 0.234883 0.012878

From the above table the p-value is 0.0128 which is less than 0.05 at 5% level of
significant. So, we reject the null hypothesis. Therefore, the null hypothesis stands
rejected and it can be said that there is a significant impact of significant impact on Non-
performing loan ratio on Profitability of Sonali Bank Limited.

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 Chapter-07
Findings, Recommendations and Conclusion

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7.1 Findings:
The major assumption under this model is that all coefficients are constant across time
period and individual bank. By interpretation, following the objective of this study, the
assumption can be summarized as follows:
 The period time used by this study (2014-2018) is the period of Sonali Bank
Limited”. The constant Effect Model thus assumes that all the coefficients in
this model remain unchanged across banks during this period.
 The time (meltdown) effect is also constant. That is, all the determinants of
Sonali Bank performance used in our model (NPAT, NPL, and Provision) are
not affected by economic meltdown.
 All the Variables are entered through the Regression process in excel. The
dependent variable is net profit after tax and the independent variables are
Non Performin loans and Provitions for loans and advances.

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7.2 Recommendations
 "Prevention is better than cure."Janata Bank Limited like any other commercial
Banks (especially private commercial banks) should take high collateral. If a
borrower defaults on a loan, the bank can sell the collateral and use the proceeds
to make up for the loss.
 The security or collateral provided must be valued properly
 The Sonali Bank Limited should have some action plan step to collect the NPLs
loan.
 Identification of highly risk sensitive borrowers in the credit portfolio. It should
take information about the clients before giving loans. It could go Bangladesh
Bank to collect the information and verify the financial statement carefully from
reliable sourcesto identify the risky borrowers.
 Identification of geographical area-wise risk sensitivity. It should identify the
clients according area wise that is mean in Bangladesh, there is some places
where growth rate is low or rate of repay rate is low.
 Prompt action on credit reports
 Sonali Bank limited ,Motijheel Brunch, should take proper steps to building
capacity of officers and executives in the recovery department to recover the
defaulted loans.
 It should give proper training to employee. Therefore, they can handle loans
properly. If there is short of experience employee, bank should recruit experience
employee for recovery department.
 A robust risk management culture, with a ‘well articulated’ risk management
policy can help the institutions to avoid such loan default.

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7.3 Conclusion
Now in Bangladesh is experiencing low profitability and inadequate capital base because
lacking of adequate controlling and excessive comepetiotion. But due to these
competition Bank’s revenue is decreasing.The cause of these problems lie in the
accumulation of high percentage of non-performing loans over a longer period of time.
The problem is most severe for government owner commercial banks.it has been
decresing over the lst 2 decades. But still it is not that bad. Unless it can be lowered
substantially we will lose competitive edge in the wave of globalization of the banking
service that is taking place throughout the world. We have had a two-decade long
experience in dealing with the NPLs problem and much is known about the causes and
remedies of the problem. Unfortunately, the banking system is still burdened with an
alarming amount of NPLs and lags far behind the neighboring countries of India and Sri
Lanka. Although Bangladesh has to a large degree adopted international standards of
loan classification and provisioning, the management of NPLs is found ineffective, as the
system has failed to arrest fresh NPLs significantly.

Sonali Bank Limited is the largest banks in Bangladesh. That is why it has to provide
huge loans and advances rather others. It is expected that the bank generates much profit
relative to others commercial banks. But due to NPL Sonali Bank limited has been
experiencing a loss from the very beginning.

The study reveals the performance of Sonali Bank Limited, Motijheel brunch. There the
overal performance is satisfactory. Due to its limited activities in the sector it is doing
quite sactisfactory over the years. In the recent years it has incresed its perfromance. The
lack of tranparency has been the biggest problem of this bank which resuluted in massive
scams in the past. Over the last 5 years this brunch live many others of its kind has been
very strict in accordance to their standard. But more measures should be taken to
overcome the level of Non Perfroming loans and if the bak wants to do well more
professionalsm in necessary.

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 References

1. Bangladesh Bank, (2018), Master Circular: Loan Classification and Provisioning,

Dhaka: Bangladesh Bank, pp.1-10
2. Bangladesh Bank. (2017), “Monthly Economic Trend, November 2017”,
Bangladesh Bank, Dhaka, Bangladesh
3. Bangladesh-bank.org, (2016), “BB Circulars”, [online] Available at:
http://www.bangladesh-bank.org/mediaroom/circulars/circulars.php [Last
Accessed 11 Jan. 2087]
4. Bank Company Act, (1991), Definition of Defaulted Borrower, Section 5(GaGa),
Bangladesh, Dhaka
5. Circulars of BB at :http://www.bb.org.bd/mediaroom/circulars/circulars.php,
[Accessed 17 Jan 2017]
6. Choudhury, T. A. and Adhikary, B. K. (2002),“Loan Classification, Provisioning
Requirement and Recovery Strategies: A comparative Study on Bangladesh and
India, Seminar Paper, Bangladesh Institute of Bank Management, January: 21
54.Mohanty, B. K. (2006), Role of Loan Classification Norms and Legal
measures in NPA Management of Banks, “The Management Accountant”, Vol.
41(1), pp. 7-12.
7. Desai, B. H. and Farmer, M. J. (2001), Taxonomic evaluation of banks’
profitability performance, “ICWAI-The Management Accountant”, Vol. 36(12),
pp. 885-891
8. Greenidge, K. and Grosvenor, T. (2010), Forecasting non-performing loans in
Barbados, Journal of Business, Finance and Economics in Emerging Economies,
Vol. 5, pp. 80-107
9. Herring, R. and Wacher, S. (1999), Real Estate Booms and Banking Busts – An
International Perspective, Group of Thirty Occasional Papers No. 58.
10. Islam, M. and Moral, L. (1999), “Bank Loan Default Problem in Bangladesh: A
dialogue Between Borrowers and Lenders”, Keynote paper (seminar paper)
presented at Bangladesh Institute of Bank Management, published in Bank
Parikrama, Vol. 22(31), pp. 35-37.

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